Facebook has apparently taken its massive user base and immense popularity to heart. The company is dictating to Wall Street underwriters what it will pay in fees for its US$5 billion initial public offering, according to news reports.
Typically, these fees would range from 3 percent to 7 percent of the offering. However, Facebook is allowing — and the banks are willing to accept — a fee of just 1.1 percent, according to unnamed sources in news reports.
Lead underwriters participating in the IPO include Morgan Stanley, JPMorgan, Goldman Sachs, Bank of America, Barclays, and Allen & Co. There are 25 other banks also participating as underwriters.
The fee structure was disclosed at a meeting Facebook held at its headquarters on Monday. Attendees agreed not to discuss the meeting publicly.
This is not the first departure Facebook has made from conventional practice, although this move could arguably be the most audacious to date.
In its S-1 filing earlier this year, Facebook made clear that CEO Mark Zuckerberg would keep a tight grip on the company.
Investor advocates consider Facebook’s board of directors weak and had been hoping for a stronger board to serve as counterweight to Zuckerberg.
However, there are numerous examples of companies with strong CEOs and weak boards. Examples of companies going public and dictating fees to Wall Street underwriters are far more rare, although it does happen. Usually the rationale for the investment banks is that by accepting the lower fees in a large offering, they are positioning themselves to earn future business from the company.
Makes a Lot of Sense
In Facebook’s case, especially, setting a lower fee structure with the underwriters is a perfectly sensible business move, Trip Chowdhry, managing director of equity research at Global Equities Research, told the E-Commerce Times.
“There is no value-add these companies can bring to Facebook,” he flatly said. “In fact, I would say 1.1 percent is too much. What they really deserve for the work they are going to put in is half that amount.”
In an ordinary public offering, Chowdhry explained, the underwriter is responsible for selling the company to investors and introducing it to the public. These firms explain the technology if it is not well understood and introduce executives to the Street if they are unknown.
Clearly, none of this will be necessary with Facebook.
“Facebook already has a brand,” said Chowdhry. “People are already interested in buying Facebook shares. They are actually already trading on the secondary market. You would have to go to Timbuktu to find someone who might not know what Facebook does and who Mark Zuckerberg is.”
Facebook also has the advantage of a solid track record in terms of raising funds, Rapid Ratings CEO James Gellert told the E-Commerce Times.
From 2008 to 2009, Facebook’s equity increased significantly and its asset base doubled, he noted.
“Over that period of time, the company’s profitability grew significantly — and more than commensurate with its increased capital base,” said Gellert. “This points to efficient investment of funds raised.”
In short, Facebook has successfully navigated the transition from a financially struggling, growth-stage tech company trying to prove its business model’s commercial viability into a strong company, he said.
Indeed, the Financial Health Rating — the metric Rapid Ratings has developed to rate companies — is a 74 for Facebook, Gellert noted. “This compares favorably with ratings assigned to more seasoned large companies in the technology space, such as 70 for Google, 74 for Intel, and 76 for Microsoft.”
Facebook did not respond to our request to comment for this story.